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3. Suppose that there is a bumper crop of coffee across the world, where more coffee than is expected is produced. As a result, Starbucks at LSU lowers the price for a cup of coffee from $2.70 to $2.00. Several days after the price change, the number of cups of coffee sold in a day has increased from 3,000 to 4,125. What is the elasticity of demand at this time scale? Is demand elastic or inelastic? If prices stay the same for several months, do you expect the reduction in consumption from the first few days to increase, decrease, or stay the same? Briefly explain your reasoning.

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Answer #1

3.

The elasticity of demand at this time scale would be:

Change in quantity demanded Initial quantity X 100 Change in price Initial price - X 100

1125 x 100 -0.7 2.7 25.92ー1.44 X 100

-1.44 is the elasticity of demand at this time scale.

Since, the elasticity of time is less -1.44 . so it is the case of elastic demand. In such situation, change in price lead to big change in quantity demanded. In this case, price of coffee lowers from $2.70 to $2.00. Therefore, if prices stay the same for several months, the reduction in consumption from the first few days to decrease.

  

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